(This is Part 7 of a series. Go back to Part 6.)
Continuing with this theme of compromise between ideals
as one means of avoiding perverse incentives, let's look at another example area:
Unemployment in Germany is currently over 12%. Indeed unemployment in Germany has been high and persistent for many years. So let's inquire: Why is unemployment so stubbornly high in Germany?
We could talk about such issues as the poor performance of the German economy, but actually that is one of the symptoms of the underlying phenomenon rather than the cause of it. The real cause, according to those who have looked carefully at the issue, is overly restrictive German work rules.
One of the primary effects of these restrictive work rules is that it is extremely difficult for a German company to fire anyone. So what? Isn't that a good thing?
Well, no, because it creates a perverse incentive. Since German companies find it so difficult to lay anyone off,
they are also very reluctant to hire anyone. Companies in Germany know that they have little or no labor flexibility, so they've become very cautious about adding employees to their payroll. Hence the persistent high unemployment.
This is an example of how overly restrictive work rules for employees can actually work against the best interests of the workers.
Yet the other extreme has been tried too, and that doesn't work well either. In a virtually unrestricted free-market setting such as existed in 19th century Britain or the U.S. "robber barron" era, workers were sometimes exploited so severely that they were little better than slaves.
Here we have two ideals: One says to allow the enormous human drive and ingenuity unleashed by the unfettered free market. The other says to take care of workers and ensure that they can count on their employment. Trouble is, neither one of these extremes works very well.
A middle road seems to work best, where employers have quite a bit of latitude to fire workers and set conditions of employment, yet at the same time there are certain basic rights and protections for workers as well.
This kind of compromise, which in a creative form is sometimes called the third way, often gives "the best of both worlds".
Actually, a creative compromise between ideals may not always be the optimal solution in all circumstances, but it often yields what is called by scientists a robust solution, that is, a solution that will perform well in a wide variety of conditions and, equally important, avoid the kinds of "evils" associated with extremes.
Another example is government programs to alleviate poverty, disability, etc. Progressives argue that in a just society the disadvantaged members of that society should be assisted. True enough.
The problem is, as numerous studies have shown, that
if payouts to the disadvantaged are too generous that a perverse incentive is created which can actually lead to
increased poverty, disability and so on. Conservatives therefore often argue that the best solution is to scrap or diminish such programs and let the marketplace allocate benefits based solely on one's talent and effort.
But of course, it's not so simple as either side maintains. Wise societies, it seems, usually opt for solutions which
maintain a creative tension between the two ideals.
We can also adopt this strategy in our personal life—that is, to avoid clinging to extreme "ideals" and instead seek out creative third alternatives. This seems to give us the best chance to avoid the creation of "evil" in our affairs.
(This is the end of Part 7. Go to Part 8.)
—jim sloman, 4.6.05
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